Higher commodity prices may have improved the net profit for producers, but as prices have risen, related service costs have escalated “tremendously,” forcing the exploration and production (E&P) sector to focus on appraisal and development projects rather than new long-lead-time exploration, according to a report by Cambridge Energy Research Associates (CERA). The latest IHS-CERA Capex Index for generic global projects found costs have risen 68% since 2000 and 18% in just the last six months.

The cost-related statistics are part of CERA’s July 2006 benchmark field-by-field analysis of worldwide hydrocarbon liquids production capacity, which is detailed in the report, “Expansion Set to Continue, Global Liquids Capacity to 2015.” The report was authored by CERA’s Director of Oil Industry Activity Peter M. Jackson and Robert W. Esser, who directs Global Oil and Gas Resources. Jackson and Esser, along with CERA Chairman Daniel Yergin, explained their findings during a teleconference on Tuesday. (CERA’s report focused on physical capacity, not actual production, which may fluctuate for political, economic or technical reasons.)

“Cost escalation shows no sign of abating in the current climate,” Jackson said. “We expect to see some projects slipping down company priority lists and being delayed as companies compete for skilled labor and resources. It is not so much a matter of cost (at current high oil price levels), as availability of these resources that constrains activity, which is already at a high level.” Projects that were economic at $22/bbl in 2000 “now need $35/bbl for similar rates of return. Some projects have already been postponed owing to higher costs and lack of equipment.”

Even at higher prices, the latest analysis continues to support CERA’s long-held view that oil production has not peaked. The “undulating plateau” for oil and gas “remains beyond the horizon, and this should allow governments time to develop policies to deal with capacity issues. We are currently in a dangerous situation with so many ‘credible’ estimates of the date of peak oil, that when the signposts for the undulating plateau finally start to appear they may well be ignored as yet another false indicator. Notwithstanding any major regional geopolitical meltdown, the undulating plateau is still out of sight. Recent events underline the risks and the vulnerability of large volumes of productive capacity to a variety of disruptive aboveground influences.”

In fact, CERA estimates that global oil and liquids supply capacity could increase as much as 25% by 2015, with unconventional sources, including natural gas-related liquids and extra-heavy oils accounting for a major proportion of net capacity growth.

“This capacity growth would accommodate rising world oil demand so long as there are no major disruptions in the actual flow of oil, for political or other reasons,” said Yergin. “The current worldwide aggregate disruption in production of 2.3 million bbl/d is about 2.6% of total world capacity. That disruption, along with geopolitical risk, has driven prices into the mid-$70s. In this very high oil price environment, companies are diversifying into unconventional assets. These unconventional liquids will loom increasingly large in the world’s oil supply — going from less than 25% today to almost 40% by 2015.”

Productive capacity is still rising globally, according to CERA, with expectations for strong continued growth and a gradual improvement in the supply/demand balance. The authors believe five main factors will affect capacity growth:

“During 2000, unconventional liquids represented 16% of global capacity, and by 2006 this had grown to 24% of the total,” Jackson said. “We expect this strong growth to continue to over one-third of total global capacity (38%) by 2015, especially if E&P companies believe that the oil price will remain high.”

The CERA report also anticipates a geographic shift in the distribution of liquids capacity by 2015. At that time, CERA is forecasting that 66% of global productive capacity will be sourced from only 15 countries mostly outside the traditional markets of North America and northwest Europe, and in some cases distant from the rapidly expanding markets in India and China. This compares to 59% today.

CERA’s examination of actual activity and production data covered existing fields and 360 new projects — 250 new nonOPEC and 110 new OPEC development projects — expected to start production by 2010. NonOPEC growth is projected to be 2.7 million bbl/d in the 2010 to 2015 time frame, lower than recent high expansion rates.

The latest update projects a short-term rate of capacity growth in 2005/2006, which is slightly lower than its May 2005 report because of slower Canadian oil sands expansion, a lack of capacity growth in Iraq, new project delays in Iran, political difficulties in Venezuela, lower growth in Russia, lower North Sea performance levels and hurricane-related difficulties and project delays in the Gulf of Mexico (GOM).

According to CERA, hurricanes Katrina and Rita disrupted more than 1 million boe/d of production and destroyed infrastructure, which resulted in about 25,000 boe/d being permanently removed from the productive capacity inventory. Initial production in some large deepwater fields in the GOM has been delayed by up to a year.

“We see much of the lost ground being made up by 2010, along with an increase of about 4 million bbl/d in our global estimate by 2015, with the inclusion of [gas-to-liquids] GTLs in the outlook along with new discoveries and existing field reserve upgrades in nonOPEC areas,” Jackson said.

Contrary to a common belief, the CERA experts believe the overall proportion of lighter liquids is expanding faster than heavy and extra-heavy crudes. Although the market seems to be focused on heavy and extra-heavy crudes, CERA sees a “strong” trend toward an expanding stream of light crude, condensates and natural gas liquids (NGLs).

“Between 2006 and 2015 we expect a major increase in total NGL plus condensate capacity from 15 million bbl/d to 25.30 million bbl/d,” said Jackson. “This reflects that many major gas projects currently under development will start producing or expand… It also reflects the strong growth in global gas productive capacity expected, especially as the liquefied natural gas (LNG) business becomes more established in countries such as Qatar and Nigeria and more stranded gas is developed. CERA expects global gas productive capacity to increase by nearly one third, from 323 Bcf to 412 Bcf per day between 2006 and 2015.”

Most of the risk factors affecting the energy supply remain “aboveground,” the report found. “In the normal course of business, projects are often delayed for a variety of reasons, including technical problems with production facilities, pipeline and export facility construction delays.” Besides increased costs, CERA also cited other problems that may affect future energy supplies, including severe weather problems (such as a Katrina-type storm), geopolitical disruptions, changing fiscal terms, decline rates and “temporary” factors, such as accidents, weather and strikes, in which volumes are reestablished within a year.

CERA “can only speculate whether further supply disruptions will become more frequent or more or less severe,” said Yergin. “The ability of E&P companies to collectively grow global production capacity at a rate allowing a comfortable supply/demand buffer that will absorb supply disruptions and manage these risks will be a critical factor in ensuring global energy security.”

To learn more about the CERA report, visit www.cera.com.

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